January's Target Zone Has Been Captured. What Next?

SPX has reached the target zone, but as of yet, there are no concrete signs of a turn.

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I'm not able to present as many charts today as I would like to because I primarily create my charts using Stockcharts.com, and the site crashed while I was working. It has remained non-functional for several hours. Fortunately, prior to the site crash, I had already finished the SPX hourly chart. I'd also partially completed a chart of the Philadelphia Bank Index (INDEXDJX:BKX), with at least has enough detail to allow me to fill in the blanks in the body of this article.

On Tuesday, the S&P 500 (INDEXSP:.INX) finally captured my 1520-1530 target zone from January 10. The bottom line now is that we'll simply have to see how the market responds before generating new targets. There are no clear signs of a turn yet, and in fact, there are some indications that this wave may still have farther to run (as shown on the BKX chart to follow). In Elliott Wave Theory, the third wave of a move usually represents the longest and strongest leg. As I wrote in the very first article of the year, on January 2 (SPX and US Dollar: Rally Likely Only Halfway Through):

In conclusion, this is not a rally I would look to short anytime soon. There is massive pent-up energy in the charts, and nested third waves are not to be trifled with. Third waves are the "point of recognition" for the masses, and tend to be strong trending waves that rarely let up for very long. Third waves tend to peg indicators at extreme readings and stay there for much longer than seems reasonable.

Since a picture is worth at least 74 words, if you've ever wondered what a third wave rally looks like up close, we need look no further than the hourly chart below. Do note the more bullish alternate count, which would postpone the blue wave 4 correction. As I've mentioned several times over the past six weeks, I do not advocate front-running against third waves. Once we see our first five-wave impulsive move to the downside, we can feel a little more confident that a correction has begun.

Click to enlarge

I didn't quite finish the BKX chart I was working on when Stockcharts crashed, but I completed enough to convey the general idea. On February 8, I noted two possibilities, and BKX appears to have chosen Door Number 2, behind which was a nest of first and second waves, and a Brunswick pool table (not shown). I've noted the first key bearish overlap on the chart, and unless price is sustained beneath that pivot in the near future, BKX is free to continue trending unabated.

One of the charts I was not able to finish prior to the gremlin attack at Stockcharts was the long-term BKX chart, which shows BXK is now within pennies of a key overlap, at 55.88. If crossed, this would add confidence to the long-term bullish outlook, and leave bears hoping for a triangle consolidation, with two large waves still left to go (we would be in wave c-up now, with d-down and e-up still to come). The triangle would get knocked out at 58.83.

Click to enlarge

In conclusion, the target zone has been captured, but there are no signs of a turn yet, and BKX suggests there may be a bit more room to run. SPX is a bit ambiguous for my liking, so I will publish new targets as they become higher probability. If you've remained long since the beginning of the year, you may be content to simply raise stops until there are more concrete signs of a turn. Trade safe.

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